42Floors gets $12.3M to make finding office space suck less

By Michael Carney , written on January 31, 2013

From The News Desk

The real estate market may not be all the way back from its end-of-decade lows, but commercial property marketplace startup 42Floors is as hot as ever. The Y-Combinator alumni company announced today that it raised $12.3 million in a Series B round of financing led by New Enterprise Associates (NEA), with participation from Series A investors Bessemer Venture Partners and Thrive Capital, as well as new investor Columbus Nova Technology Partners. NEA partner and marketplace expert Paul Hsiao will join the company’s board of directors.

42Floors expanded to New York City in November with the backing of two third-generation New York real estate tycoons. The unforgiving market which typically shuns outsiders and new technologies, has been anything but in the company’s first three months. In the last year since first launching in San Francisco, 42Floors has helped over 1,000 companies find more than 2 million square feet of office space – enough to fill the empire state building.

In a job posting on the Hacker News message board, the company previously wrote, “We discovered in our previous companies how much it sucks to search for office space. It’s effectively a data problem and we believe passionately in the power of the internet to bring transparency to rusty old industries.”

The company began by targeting fellow tech startups in the hotbeds of San Francisco and New York City. But the platform has grown to be used by all types of businesses, according to a blog post by the company today. More surprising to founder Jason Freedman, is that more than 80 percent of searches on 42Floors have been for office space outside of the company’s two current markets. Given this pent-up demand, the CEO promises expansion to new cities is coming soon. While he hasn’t specified the rollout plan, the map of existing search activity would indicate that Los Angeles, Chicago, and Boston are likely the next three destinations.

In conjunction with today’s financing, the company is also announcing that several of the nation’s largest property owners and managers, including Vornado, Equity Office, SL Green, and Shorenstein, will begin listing their properties on the platform.

Real Estate is one of those markets that has resisted the advances of technology more than most. But 42Floors introduces an efficiency to the marketplace that benefit renters, property owners, and brokers – an atypical balance to strike.

Unlike most traditional online real estate portals, company’s property search engine is heavy on images, including those of the insides and outsides of all buildings. The savvy startup maintains this coverage through a network of freelance photographers in each market which are available on-demand when a new listing is added to the system. The service is free of charge to the property owner, and adds massive value to the users of the marketplace.

“Our goal is to raise the bar across the industry of how owners show off their properties,” Freedman said to me previously.

42Floors previously raised $5.4 million in its Seed and Series A rounds from the above-mentioned Bessemer Venture Partners and Thrive Capital, as well as Alexis Ohanian, Chris Dixon, Dave McClure, SV Angel, Start Fund, and Y Combinator.

Contrary to what might be expected, Freedman’s company doesn’t monetize through collecting a commission on leases signed through its platform. Instead, the startup operates a curated online affiliate marketplace called the Showroom, which offers furniture, decor, accessories, and services essential to commercial renters, and collects a fee when users transact. Eventually, the company plans to transition this to a full ecommerce marketplace. The startup reports that the strategy is working, and has no plans to explore monetization alternatives.

It hasn’t always been easy winning over each constituency in new markets. Brokers are suspect of the site for obvious reasons. But this tends to change once they realize that 42Floors focuses on the type of fragmented, low-margin space that growing companies occupy on short-term leases. Landlords too typically start out skeptical, having been burned in the past by fly-by-night technology companies that promise the world only to go out of business a few months or years later. Even these old-school property owners and managers quickly come around they realize that the service is free and delivers results.

But real estate is a massive market, with an incredibly long, “long tail.” Becoming the definitive solution in large and small cities across the country, and among conglomerate and mom and pop property owners, means having to deliver 42Floors’ message to tens of thousands of disconnected audiences – an enormous challenge. The economics of launching smaller markets and maintaining the degree of service and efficiency possible in New York and San Francisco present another unknown.

The latest round of financing means that 42Floors is unlikely to disappear anytime soon. The company does not disclose its specific financial results, but given the quick succession with which it raised its Series A and B rounds, it’s safe to assume that the trends are heading in the right direction.

Commercial real estate, like other legacy industries, has begged for disruption for some time. 42Floors is the first to strike the difficult balance of benefiting property owners, brokers, and tenants simultaneously. Now the challenge is to maintain this symmetry, and extend its success to tier two and three US cities.